Bottom Line: Strong returns with less volatility.
The classic formula for investment portfolios is roughly 60% large-cap stocks and 40% high-quality bonds. This mix aims to produce strong long-term returns while cushioning against big losses and volatility. It’s useful to keep in mind as investors grow nervous about the possibility of a recession and its effects on stocks.
From 1970 through 2018, studies show, a 60/40 balanced allocation, using the S&P 500 Index and five-year US government Treasuries, had annualized returns of 9.1%. That’s nearly as good as the 10.1% return for an all-stock portfolio—with 40% less volatility. The worst three-year return for the balanced allocation was a loss of 6.8% versus a loss of 16.2% for 100% stocks.
If you prefer not to manage your own stock portfolio: The Vanguard Balanced Index Fund (VBINX) follows the classic formula and has an annual expense ratio of just 0.18%. 10-year annualized performance: 9.6%.
Important: This type of balanced allocation requires patience and discipline because returns can trail all-stock portfolios for long periods in bull markets but hold up much better in down markets. Depending on your risk tolerance, you also can consider an actively managed balanced fund such as the following that tweak the classic formula…
For more aggressive investors: Dodge & Cox Balanced (DODBX) holds as much as 70% in stocks and produces slightly higher volatility as it strives for better long-term returns than a 60/40 allocation. It recently held a 65%/35% stock-bond split. 10-year annualized performance: 10.4%.
For more conservative investors: Oakmark Equity and Income (OAKBX) recently kept 61% in stocks, 29% in bonds and 10% in cash. Its penchant for deeply undervalued stocks plus a hefty cash stake greatly mutes losses in downturns but weakens overall returns. 10-year annualized performance: 7.9%.